* Had been expected to buy a stake in $3 bln Cuervo
* Distribution deal ends in June, all talks terminated
* Sauza maker Beam may feature on Diageo shopping list
* Diageo shares fall 1.6 pct; Beam up 2.8 pct; Pernod up 1
By Rosalba O'Brien
LONDON, Dec 11 Diageo has pulled out of
talks to buy a stake in top-selling tequila brand Jose Cuervo in
a surprise move that fuelled speculation that the world's
biggest spirits maker could now set its sights on smaller rival
The collapse of discussions with Cuervo, which has a
distribution deal with Diageo due to end in June 2013, will
leave Diageo without a major tequila brand and Cuervo without a
distributor outside its home market of Mexico.
Shares of Beam, which owns the world's No. 2 tequila, Sauza,
closed up 2.8 percent at $61.56 in New York, while Diageo shares
closed down 1.6 percent at 1856 pence in London. Shares of
French rival Pernod, which an industry source said
could now link up with Cuervo, closed up nearly 1 percent in
"With this development, the probability (of a deal for Beam)
looks higher," said Morningstar analyst Kenneth Perkins, noting
that Diageo executives have hinted in the past that Beam had
some attractive assets, namely a range of bourbon whiskeys.
Faced with sluggish growth in recession-hit European
economies, Diageo has been looking to tap burgeoning middle
classes in Africa, Asia and Latin America, where it aims to make
around half of its turnover by 2015.
A deal with Jose Cuervo, valued at about $3 billion, would
have given the British group access to the emerging Mexican
spirits market and a stronger product range there to go with its
Johnnie Walker whisky and Smirnoff vodka brands.
Diageo, Cuervo's distributor outside Mexico, had been
expected to take a stake in the business with the possibility of
gaining majority control at a later date.
But the firm said in a statement on Tuesday that discussions
had broken down without agreement, after the two companies had
been wrangling over price for more than a year.
RBC analysts noted that Cuervo only accounted for about 3
percent of Diageo revenue and 2 percent of profit, and said the
failure of the deal might free up funds for other transactions.
A weekend newspaper report said Diageo had held talks with
Japanese brewer Suntory over a joint bid for Beam
worth over $10 billion. Diageo declined to comment.
"Whether Diageo was just using the threat of buying Beam as
a bargaining tool with Cuervo is hard to say. But now the market
will probably ascribe a higher probability that Diageo will take
a look closer at Beam's portfolio," said analysts at Davy.
Some analysts, however, have said Diageo may not want to pay
the price Beam would command, while anti-trust regulators may
also prove to be a hurdle. The maker of Jim Beam, Maker's Mark
and Knob Creek bourbons beat quarterly profit expectations last
month and is considered a success story since going public late
It has also bulked up with several acquisitions of its own,
adding brands like Pinnacle vodka and Skinnygirl.
The company's shares gained 13 percent since Nov. 27 amid
speculation about a takeover. Adding in Tuesday's jump, Beam's
market capitalization stood at $9.85 billion.
A Beam spokesman declined to comment on rumour or
Cuervo is owned by the Beckmann family, heirs to the Cuervo
family who founded the company in the Mexican town of Tequila in
1795. The business is the clear leader in tequila's two biggest
markets, the United States and Mexico, ahead of Sauza.
However, Cuervo's U.S. share has been gradually declining.
It was one of Diageo's lowest margin brands and was not
realising its potential in the United States, Diageo's Walsh
said when talks started in 2011.
Beckmann-owned Proximo would be the most likely distributor
for Cuervo in the United States once the Diageo agreement ends,
UBS analysts said.
"Cuervo has two problems at the moment: they are
mono-product and mono-geography. They absolutely need to
diversify the business to maintain its value," an industry
The source added that Pernod Ricard, the world's
second-largest spirits group and the firm behind Absolut vodka
and Mumm champagne, could now look at Cuervo, and also Beam.
"Having more tequila in their portfolio would not hurt," the
source said. Pernod sells small, high-end tequila brands, but
like Diageo, does not own a mass-market brand.
Premium tequilas, which are high margin and high growth, are
made entirely from the blue agave plant that grows in the
Mexican state of Jalisco, while cheaper brands are mixed with
spirit derived from sugar cane and other sources.
Diageo said it plans to return to the No. 1 maker of tequila
in North America through innovation, acquisitions and
partnerships. The company's North America President Larry
Schwartz told analysts that if Diageo were to buy another
tequila, it would like it to be 100 percent agave, but still be
Like Cuervo, Sauza's main brand is a mixed tequila, but its
Sauza Blue, Hornitos and Tres Generaciones lines are pure agave.
Diageo could also focus on innovating with its high-end Don
Julio brand, while it digests other acquisitions.
Last month, it paid $2.1 billion for a majority stake in
India's largest spirits company, United Spirits, and it has also
secured smaller deals for producers of baiju, cachaca and raki
in China, Brazil and Turkey.
The group, whose brands also include Smirnoff vodka,
Tanqueray gin, and Baileys liqueur, was advised on the Jose
Cuervo talks by Goldman Sachs and HSBC. The Beckmanns have been
advised by Barclays.